NHS Additional Pension Payments or something else

Richteasandwich

I am trying to help my MIL look at the best option now that she has a little extra cash each month (£300) after paying off a loan.  She is due to reach SPA in 18 months and becomes eligible for her 2015 Scheme pension.  I've looked at the NHS additional contributions calculator and it seems to say that for an additional monthly payment of £393 (£4,716 per annum) she will get £250 additional pension per annum when she retires.  I know the pension will pay out indefinitely and on her death will pay out a % to her spouse but have I understood it correctly that means it will take almost 19 years to 'break even' (£4,716/250=18.864 years)? The calculator won't let me increase her payments to more than 1 year's worth due to her SPA even though she is considering keeping working past her retirement date.  I'm not sure that this is the best use of the extra £300 she has her a month.  Could anyone please advise?

Dazed_and_C0nfused

Have you factored in tax relief on the contributions?  The real cost may only be £3773.

Although depending on her income in retirement she may also be paying 20% tax on the £250 so possibly swings and roundabouts 

Richteasandwich

No, I hadn’t factored in the tax relief, that’s a good point. But as you say it’s likely swings & roundabouts.  I naively assumed at the outset that it would be a no brainer to make additional contributions as the NHS pension seems to be so good but this doesn’t seem worthwhile. 

Dazed_and_C0nfused

Don't forget the contribution is over and done with after a year.  Fixed cost.

But the £250 (or £200 after tax) is presumably inflation proofed in some way so the real break even point will be less.  Although it's impossible to know how much inflation increases will impact things.

A separate personal pension or SIPP would have more flexibility and her £300 would have 25% added by the pension company (courtesy of HMRC) so she'd have a pot of £4,500 after a year.

Richteasandwich

Thank you @Dazed_and_C0nfused I did wonder about a separate personal pension. 

OldBeanz

Richteasandwich said:

Thank you @Dazed_and_C0nfused I did wonder about a separate personal pension. 

Inflation is a consideration.

NedS

Richteasandwich said:

I am trying to help my MIL look at the best option now that she has a little extra cash each month (£300) after paying off a loan.  She is due to reach SPA in 18 months and becomes eligible for her 2015 Scheme pension.  I've looked at the NHS additional contributions calculator and it seems to say that for an additional monthly payment of £393 (£4,716 per annum) she will get £250 additional pension per annum when she retires.  I know the pension will pay out indefinitely and on her death will pay out a % to her spouse but have I understood it correctly that means it will take almost 19 years to 'break even' (£4,716/250=18.864 years)? The calculator won't let me increase her payments to more than 1 year's worth due to her SPA even though she is considering keeping working past her retirement date.  I'm not sure that this is the best use of the extra £300 she has her a month.  Could anyone please advise?

Such additional pension purchases in a DB scheme are not designed to be either good or poor value - you are simply purchasing a guarantee to pay that amount for life. The figures are calculated based on average life expectancy such that if she lives to exactly average life expectancy she will neither gain nor lose - live longer and she gains, die earlier and she loses out (notwithstanding spousal payments). What you are buying is an index-linked guarantee to pay an annual amount. To decide if it represents good value, you should compare against the rates for an equivalent annuity offering the same guarantees and spousal benefits.

She may not be able to have a quote for purchasing additional pension in the second year as usually quotes are based on monthly contributions for a full year, and her SPA falls half way through that year. What she may be able to do in the second year is make a lump sum purchase which will achieve the same thing.

Thrugelmir

Richteasandwich said:

but have I understood it correctly that means it will take almost 19 years to 'break even' (£4,716/250=18.864 years)?

Guaranteed to rise with inflation. Investments carry no such guarantees. 

Richteasandwich

Thanks for the comments. I think I’m looking at it the wrong way as wasn’t really thinking about inflation proofing and guarantee of income. It’s just on paper it doesn’t sound great and my MIL dismissed it straight away (assuming I’ve done the calc right too!). 

Dazed_and_C0nfused

Clearly future long term inflation is unknown but the latest increases have been 0.5% (from April 2021) and 3.1% (April 2022).

Nurse2047

You could also set up a NHS AVC